The world of Finance has exploded with several advancements and innovations giving chance for refining the payment ecosystem across different economies. In the wave of Blockchain expansion and adoption, the concept of CBDCs (Central Bank Digital Currency) became the hot potato for several countries in the world. The idea of CBDCs originated in the year 2018 when the central banks felt the need to adopt digitalization on a wider scale. As a result, the authorities began to strategize their approach to the payment system.
What is CBDCs?
The research shows that 80% of the central banks are working on launching the CBDCs into their ecosystem to ensure the relevancy of the currencies. In general, CBDCs are of three types – the wholesale CBDCs that transact between the Central and Commercial Bank whereas the others are cross-borders CBDCs, and retail CBDCs. The flavors of the CBDCs would be based on the purpose it’s meant for. These applications would be defined from the economic standpoint where the focus would be on making the money readily available and accessible even in the absence of Bank accounts.
Impacts of CBDCs on traditional payment system
CBDCs world is certain to impact the traditional system with its introduction. The cross-border payment system seems to be outdated, expensive, and slow. As a result, the blockchain-based CBDC is potent to bring better revenue from cross-border transactions. However, certain challenges in its settlement stage make the process quite painful. But once it’s done, its results are worth the pain. Like Stablecoin CBDCs can also boost the idea of composability in Finance which brings money closer to assets and the creation of the digital asset.
Furthermore, it also impacts the process of credit creation as the banks would be able to replicate the remittance function with the help of CBDC retail. This digital currency is also believed to allow more withdrawal benefits for the people due to increase convertibility and liquidity. Thus, with a well-designed CBDC structure, the financial authorities can gain customer trust and decrease their over and downtime. It can be said that CBDCs are the smoother and easier way to tackle the unintended operational consequences.
Despite being the pool of benefits CBDCs face certain challenges of which acceptance of unique users’ tops the list. People still see it as a matter of privacy concern and try to remain aloof. The developing or underdeveloped countries perceive CDBCs as a threat to their sensitive data and thus aren’t welcoming it wholeheartedly.
CBDCs Trend across the globe
The concept of CBDC is still said to be in its discovery phase where the 100 countries happen to discover the potential and problems with CBDCs. In China alone, the 24 cities CBDC projects have experimented and a similar number of wallets is opened. According to the reports of PBOC’s Digital Currency Institute $9 billion of the transactions were successfully recorded on such wallets in its initial days. Hence, China’s e-CNY is in continuous motion and has reached 100 million individual users while expanding to billions of transactions.
The Sand Dollar – Bahamas local CBDC is in circulation for almost a year now whereas Sweden’s Riksbank has completed its proof of concept and can be launched as a policy implication anytime soon now. Alongside, the Federal Reserve statements claiming CBDC to be the game-changer for US Financial System is a big boost for the CBDC ecosystem. Moreover, according to the declaration in Feb 2022, the Indian Government also plans to launch its own CBDC within a year. Thus, many countries are putting their best foot forward for the implementation of CBDCs into their financial culture.
Potential Impacts of CBDCs for India
India is a highly populated country with an economic size of around three trillion dollars and at times becomes difficult to manage cash currencies. Many times, the leading banks can be observed guzzling the money. Thus, the CBDC can revolutionize the process and lead to cost reduction and better efficiency.
The CBDC, being the digital currency can also tackle the issues relating to digital payment which would become extremely robust. Moreover, the biggest advantage that India holds is that it operates on the world’s most efficient and cheapest real-time payment structure where settlement is well structured. This gives an added advantage when India plans to launch CBDC.
The country has already been fast-paced to adapt UPI as a payment system and cryptocurrency revolution despite the several setbacks from the government. This indicates the fact that the Indian market is all set to welcome the advancement and adapt them with open arms despite being a developing nation.
It is the next revolutionary product of Blockchain after Bitcoins, Altcoins, Stablecoin, NFT, and more. Some countries are in the final phase of the launch, some are ready with Proof of Concept, a few are working on their pilot projects while the others are planning to formulate a design. Whatever the case may be, CBDCs are on the way and all set to explode the cryptocurrency ecosystem.